Man. I don’t know. I don’t know, man. Elon Musk tweeted yesterday that he is “considering taking Tesla private at $420. Funding secured,” and the internet was engulfed in a ball of flame that was visible from space. There are questions! Let’s start with: Why? Here is Musk’s explanation from yesterday afternoon:
First, a final decision has not yet been made, but the reason for doing this is all about creating the environment for Tesla to operate best. As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.
I fundamentally believe that we are at our best when everyone is focused on executing, when we can remain focused on our long-term mission, and when there are not perverse incentives for people to try to harm what we’re all trying to achieve. …
Basically, I’m trying to accomplish an outcome where Tesla can operate at its best, free from as much distraction and short-term thinking as possible, and where there is as little change for all of our investors, including all of our employees, as possible.
Now I do not mean to be rude, but is it possible that a CEO who is constantly tweeting attacks on journalists and jokes about bankruptcy, who is also busy running two other companies, who built a mini-submarine and jetted off to Thailand to try to rescue those boys in a cave and then tweeted slanders about someone who actually helped rescue them, and who runs around distributing flamethrowers, might be … distractible? A distraction? Both? Plenty of CEOs go around mouthing very serious platitudes about how public markets and quarterly earnings are a distraction from the important business of running their companies, and you kind of have to take them at their word that were it not for the demands of earnings releases they would be laser-focused on operations, but … Musk … like, we can him tweeting! Twitter is public! The distraction is coming from inside the house! Does he think that “going private” means “getting off Twitter”? You can just get off Twitter! It doesn’t even require any financing!
I don’t know. My Bloomberg Opinion colleague Liam Denning writes that “it would be a mercy if Tesla did actually go private,” and that Tesla’s short-term production and cash-flow targets “sit oddly with the idea of Tesla building a sustainable business for the long term.” And Felix Salmon sympathizes with Musk:
Public companies in general, and Tesla in particular, tend to get conflated with their stocks: If the stock is doing well, then the company is doing well, and vice versa. What’s more, attacks on the stock from short sellers, of which there have been many, are tantamount to attacks on the company. It’s highly distracting for a CEO, who ends up spending a lot of time worrying about the public perception of the company, at the expense of time spent actually running the shop.
My impression is that there are a lot of public-company CEOs who spend all day publicly feuding with short sellers, due to some combination of personal temperament, good legal advice, and not presenting such a tempting target to the shorts. I doubt Tesla’s senior engineers are spending all time worrying about short sellers. And I gather that the CEO of say Uber Technologies Inc. spends quite a bit of his time on public perception. Tesla is a large high-profile consumer-facing company with an outspoken, hyperactive, multitasking CEO who likes to pick fights; none of those fundamentals will change if its stock is no longer listed on an exchange.
Next: “Taking Tesla private.” What does that mean? It doesn’t mean that Musk would buy it for himself:
I own about 20% of the company now, and I don’t envision that being substantially different after any deal is completed.
So who would own the company after he takes it private but doesn’t concentrate his ownership?
I would like to structure this so that all shareholders have a choice. Either they can stay investors in a private Tesla or they can be bought out at $420 per share, which is a 20% premium over the stock price following our Q2 earnings call (which had already increased by 16%). My hope is for all shareholders to remain, but if they prefer to be bought out, then this would enable that to happen at a nice premium.
Ah. So Tesla would be owned by the same number of shareholders, in the same proportions as now? But it would somehow be … private? I don’t … think … that’s how … any of this … like, if you have thousands of retail shareholders, you’re still giving them quarterly 10-Qs. That’s what being public means. It means being open to unlimited numbers of retail shareholders. And the securities laws, in their wisdom, say that if you do that then you need to give them quarterly earnings information.
Musk does gesture at an idea here:
Would create special purpose fund enabling anyone to stay with Tesla. Already do this with Fidelity’s SpaceX investment.
And yes there a bit of a trick to get around the requirements of being public: You sell shares to investor, but that one investor is a special-purpose fund that raises money from lots of other people. Uber does something like this: It raised money from two funds run by Morgan Stanley and Bank of America Merrill Lynch, and the banks sold shares in those funds to their private-wealth clients. (SpaceX, however, does not: Fidelity’s investment in SpaceX is held through its regular mutual funds, none of which are concentrated in SpaceX.) Investors in the funds get no financial statements from Uber, just the very boring balance sheet of the funds showing that they own a bunch of Uber shares. And because they are private funds, you can’t short them.
But the Uber funds are open only to “accredited investors”—the two funds had net worth requirements of $10 million and $100 million—and so can avoid the requirements of public registration. If the Tesla fund is genuinely open to everyone, then … it would have to be … public?
A special-purpose vehicle that is accessible to all shareholders would be unprecedented, lawyers said. Tesla would effectively be creating a new public company and would need to file a registration statement with regulators.
It’s unprecedented, so it is hard to know how it would work, but presumably there’d be quarterly financial statements? And maybe even a stock-exchange listing and short selling?
But maybe not. There is another problem, though. Uber was never public; buying shares in the single-purpose fund was the best chance (rich, accredited) individual investors had to get into Uber. But Musk seems to be proposing to take a bunch of public shareholders and them into shares of the new entity. Like, Tesla would have to send out a proxy/prospectus to shareholders offering them the opportunity to exchange one Tesla share for one New Mystery Tesla share—effectively a Tesla share, but without regular financial disclosure or the ability to trade it on a stock exchange. Could Tesla’s lawyers write that proxy/prospectus with a straight face? Could Tesla’s board of directors sign off on it—and on offering that trade to shareholders—with a straight face? Could the Securities and Exchange Commission allow it? I suspect there’s a reason this doesn’t happen. (In fact buyouts with “stub” equity pieces are quite rare in the U.S., and normally the stubs are held by a few concentrated private holders, not offered broadly to prior shareholders.)
Nor, of course, it happen: The basic premise of U.S. securities laws is that you can’t raise money broadly from public retail investors without giving them the disclosure required of public companies. You shouldn’t be able to get around that with such an obvious cheat. Musk amusingly named his promotional flamethrowers “Not a Flamethrower” to get around shipping rules banning flamethrowers, and he seems to have learned the wrong lesson from that stunt. I suspect that naming his public company “Not a Public Company” won’t actually work to get around securities laws.
Okay next: “Financing secured.” Of course Musk doesn’t actually need any financing if he succeeds in his plan of keeping Tesla owned by the same shareholders but wearing fake mustaches. But assuming that a large number of Tesla’s shareholders prefer the cash—a reasonable assumption given that Tesla closed at $341.99 on Monday, before this all got going, so the supposed deal would offer a substantial premium—then he will need to come up with some number of tens of billions of dollars. If you’re offering a cash option to everyone then you really do need to have credible commitments for about an $82 billion enterprise value including options, debt, etc.; Musk’s own stake is worth about $16 billion at the deal price.
Where does the other $66 billion come from? Well, you could replace the public shareholders with private ones; Saudi Arabia’s sovereign-wealth fund recently took a $2 billion stake in Tesla, and perhaps there are other big deep-pocketed investors that would like to invest in, or roll their existing stakes into, a private Tesla. (Surely the SoftBank Vision Fund would kick in $10 billion just for the entertainment value?) It is not exactly orthodox to do a buyout with all equity financing—they are usually called “leveraged buyouts”—but nothing about this situation is particularly orthodox, and Musk’s rationale has nothing to do with adjusting Tesla’s capital structure. (“While several press reports suggest an ‘LBO,’ given Tesla's EBITDA and cash generation today, we don’t see material leverage as likely,” write analysts at Evercore.) The problem is not that Tesla doesn’t have enough debt; it’s that it has too many short sellers. All-equity financing would, for Musk, be fine; he just wants the equity to be held by different people.
Would big investors be interested in buying equity in a private Tesla? Traditionally you’d say that the people able to write big private-equity checks would not be interested in an unlevered buyout of a public company; investors willing to take the risk and illiquidity of private equity investments want the high returns that come from either early-stage venture investing or from leveraged buyouts. But the recent years of unicorn mega-funding have changed that expectation. Uber, for instance, is a $50+ billion company that is constantly peeling off billion-dollar financing rounds. The market for unlevered equity stakes of mature private companies with 11-digit valuations is actually quite robust. If Musk announced today that his financing sources have committed $60 billion of equity I would be, yes, surprised, absolutely, but it would also, in this weird world we live in, make a kind of sense.
But normally the way you fund a $60 billion buyout is with at least, say, $40 billion of debt. And seems like it would be hard. (Also just casually “ the largest leveraged buyout in history,” which is maybe the 18th-most-notable thing about this supposed deal.) Tesla “has lost money on an operating basis every year since it went public.” It “is the exact opposite of the type of company buyout firms want,” writes Charley Grant: “It burns rather than generates cash and it is already neck deep in liabilities.” And never mind buyout firms: “Funding secured” would suggest, on an ordinary reading, that Musk has gotten commitments from that they can raise any necessary debt, which seems like quite a bold commitment. “Officials representing a number of large banks and investment funds said on Tuesday that they had not talked with Tesla about financing a buyout.”
Now Tesla have debt: It has three different convertible bonds, but it also has $1.8 billion of straight bonds that it issued last August to quite receptive investors. Those bonds have sold off since issuance and are rated Caa1 at Moody’s, which, again, are not auspicious signs for adding like 20 times as much debt. And my general assumption about Tesla bonds is that they operate on sort of a Netflix theory, in which bondholders get their security not from the company’s cash flows but from the knowledge that there’s a whole lot of equity value beneath them. If you issue billions more dollars of bonds to get rid of that equity, then why would anyone buy the bonds? FT Alphaville notes that the pressure of public markets, for Tesla, “surely pales in comparison to the pressure to maintain bank/ bond covenants and make interest payments.” “Even if say $40 billion could be financed in the high yield market,” note analysts at Barclays, “the annual interest bill would consume $2.7 billion in cash.”
Okay one more question: Is this … legal? Is it … securities fraud? Well, look, I mean, if Musk’s tweets are accurate in all material respects, then it’s fine, and if not, then it’s not? I mean, that is not legal advice, but it seems reasonable? Obviously even if you definitively planning to take your company private, and have lined up financing, it is not to announce it in a tweet. It’s not best practices. But if it’s true, you know, whatever. Does it violate Regulation FD to announce it via tweet rather than press release? No, come on, this is Tesla, everyone is reading Musk’s tweets. I have never seen a buyout proposal get a tenth as much immediate public attention as Musk’s did; if you’re worried about everyone hearing about it at the same time, Musk tweeting it is the optimal disclosure method.
But what if Musk promptly go ahead with a fully financed buyout offer? Arguably he has left himself some wiggle room by saying that he’s “considering” it, but only a little. A follow-up tweet said “Only reason why this is not certain is that it’s contingent on a shareholder vote,” which sure looks to me like he is definitively committed to making the offer, and that the only way the buyout won’t happen is if shareholders vote it down. This is of course a strange posture: Tesla’s board of directors—and probably an independent special committee of the board—will have to sign off on a merger before it goes to a shareholder vote. There’s no indication that a special committee has even been formed, though this morning some board members put out a short statement saying that they’ve discussed the going-private idea with Musk. But sure, if you assume, reasonably, that the board will do what Musk wants, then it seems like he has committed to offering a fully financed deal at $420 and putting it to a shareholder vote.
So if he doesn’t go through with it, after pretty explicitly promising that he would, then that is … embarrassing. More than embarrassing? The stock closed up 11 percent yesterday due to his tweets. If those tweets turn out to be misleading—if it turns out, in particular, that Musk has “secured” funding for his proposal—then a lot of people were misled out of a lot of money. Musk has said things that were not true on Twitter before, including about Tesla’s financial situation, but those were jokes, or just Elon being Elon. There is something different about pretending to launch a buyout of a public company in order to drive up the price, and then not doing it. That’s a thing that the Securities and Exchange Commission pays attention to! That’s a thing that people go to prison for!
And Musk has been in a very public rage at short sellers for ages, tweeting things like “short burn of the century coming soon” and “they have about three weeks before their short position explodes” (about six weeks ago) and “the sheer magnitude of short carnage will be unreal.” If you announce a buyout of your company, and you go through with it, and your main purpose in doing it is to squeeze the shorts: Yeah, fine, that’s business, that’s cool. But if you make clear your burning desire to squeeze short sellers, and then you announce a buyout of your company, and the stock soars and the shorts get squeezed, and then you are like “oh no I meant I’m taking my account private,” then that is going to look awfully suspicious. It is going to look like an explicit announcement of manipulative intent, followed by a successful manipulation.
Assuming, somewhat recklessly, that someone has told him this and that he listened, then the most reasonable conclusion would seem to be: Elon Musk is really going to make an offer to take Tesla private! With an incredibly weird structure, and incredibly weird financing, and announcing it in an incredibly weird way. And probably everything I wrote above will be superseded by something even weirder by lunchtime today. It should be great.
There are other things too.
Like, I guess:
- John Schnatter, the ousted CEO and estranged father of pizza chain Papa John’s International Inc., put out a “blistering statement” about the company’s quarterly results. But a “blistering statement” is not quite the same thing as a concrete offer to buy back the company, about which there has been a lot of speculation since his removal (and since the company put in place a poison pill to stop him), so it is hard to pay much attention to his fight when, you know, Elon Musk, etc.
- Barry McCarthy, the chief financial officer of Spotify, wrote an op-ed saying that Spotify’s decision to do a direct listing instead of an initial public offering was great and that more companies should try it. Even if, unlike Spotify, they actually need to raise money: Doing the direct listing first, and raising money, might be more efficient than doing an IPO to go public and raise money simultaneously.
Deciding whether a company needs to raise money is an important strategic question. So is the issue of whether it needs a public stock listing. But it is a mistake to conflate the two. …
At Spotify, for instance, if we needed to raise capital today, we believe we could sell additional shares in the public or private markets at a 2 to 4 per cent discount to fair market value and pay a 1 per cent advisory fee to our investment bankers.
We also could sell convertible bonds, or do both. So could any other company that chose a direct listing instead of a traditional IPO.
- Here’s a story about how SoftBank Group Corp., which invests vast piles of money in lots of buzzy private companies, helps its portfolio companies partner with and sell to each other, with a SoftBank team assigned to “assessing possible partnerships and synergies.” There are two broadly customary ways to structure intercorporate relationships: The market, in which companies make independent decisions about what other companies to buy from and sell to, and the conglomerate, in which a bunch of different companies are owned by the same big company which makes centralized decisions about how they deal with each other. But intermediate approaches are possible. If you have one big company that owns high-profile minority stakes in lots of other companies, it can certainly make suggestions about who should sell what to whom.
- Perhaps related, here is Brian Cheffins of Cambridge on “ The Rise and Fall (?) of the Berle-Means Corporation”:
Adolf Berle … and Gardiner Means documented in The Modern Corporation and Private Property (1932) what they said was a separation of ownership and control in major American business enterprises. Berle and Means became sufficiently closely associated with the separation of ownership and control pattern for the large American public firm to be christened subsequently “the Berle-Means corporation”. This paper focuses on the “rise” of the Berle-Means corporation, considering in so doing why ownership became divorced from control in most of America’s biggest companies. It also assesses whether developments concerning institutional investors and shareholder activism have precipitated the “fall” of the Berle-Means corporation, meaning U.S. corporate governance is no longer characterized by a separation of ownership and control.
- “Initial coin offerings have raised $18 billion for blockchain startups this year, almost five times last year’s total,” but they are increasingly limited to accredited investors in order to comply with U.S. securities regulations. “This has made cryptocurrencies a little less like the Wild West and more like traditional venture investing.” Also a little less like , though. Like if you build a platform for people to buy and sell widgets using your lovingly crafted WidgetCoin token, and then you only sell WidgetCoins to millionaires for compliance reasons, then it’s never really going to take off as a widget trading platform is it?
- Here is Alexandra Scaggs on municipal bonds, Puerto Rico, state accession, federalism, fiscal coordination, civil society and the Articles of Confederation.
CBS Seeks Information from AT&T on Talks With Controlling Shareholder. Crypto’s $600 Billion Crash Hits a New Low. What Your Boss Could Learn by Reading the Whole Company’s Emails. When a Female C.E.O. Leaves, the Glass Ceiling Is Restored. People are worried about stock buybacks by mining companies. Twitter “is built to reward us for snarky in-group communication designed to encourage unintended out-group readership.” New Details About Wilbur Ross’ Business Point To Pattern Of Grifting. Betsy DeVos’s summer home is a bit much. Man accused of killing family wants his trust fund.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the editor responsible for this story:
James Greiff at firstname.lastname@example.org